Grant Shapps and the housing market
Grant Shapps, the housing minister, has made some fairly controversial statements about the housing market. He suggests that house prices are too high and that policy should be directed to correcting what he sees as an imbalance.
I think he’s wrong, for several reasons.
Firstly, it’s always dangerous for governments to try and influence the market directly; they usually fail or trigger worse unintended consequences.
Secondly, it’s not at all clear that house prices are too high. On one analysis at least, they’re not high enough. Now I know that this is music to the ears of that despicable profession, estate agency, but it’s worth pointing out why. Rental yields are currently running at over 5%, while 5-year gilt yields are just over 2%. If you’ve got money you’re happy to lock away for several years, London rental property is the best place to put it. With gearing, the rental yields are even higher. I think we now need to look at residential property values primarily from an investment perspective looking at rental yields, and not – as we have in the past – in relation to average earnings and affordability.
Because of these high rental yields, buy-to-let investors are keeping first-time buyers out of the market, particularly as lenders now want a much smaller loan-to-value ratio than in the past. These tight credit requirements are the biggest change in the property market since the 2008 crash. Unfortunately, Grant Shapps’ stated intention to reduce house prices in real terms will do nothing to encourage a return to 95% mortgages. Lenders can safely lend 90 or even 100% of the value of a property in a steadily-appreciating market; but where prices are falling – as Grant Shapps seems to want to encourage – they will quickly find themselves exposed to negative equity risk.
A much more radical solution is to take this as an opportunity to wean the next generation from our dependency on property as a savings vehicle. The boomer generation mostly owns the properties, and for them, property has been the only safe investment as equities have performed badly over time and managed savings products, such as endowment policies and defined-contribution pensions, even worse. Many of the boomer generation will be relying on rental income from their property portfolios to boost their disappointing pensions. This poor investment return is due mainly to the uncompetitive inefficiencies in the financial services sector, which is a longer argument to rehearse, but – in my opinion – adds up to an incontrovertible case.
If inefficiencies in financial services were eliminated and the industry provided an effective method of recycling savings into capital for enterprise, today’s young people worried about getting a foot on the housing ladder could, instead, put their surplus cash into enterprise equity. At present it sits mostly in low-yielding cash deposits in a vain attempt to save for an impossible deposit on the first-rung property. The young will still have to pay rent to landlords of their parents’ generation, but if they didn’t, those landlords would become a burden to the taxpayer because of their inadequate pensions, and those same tenants would end up paying, through taxation, as much as they do in surplus rent (that is, anything more that they pay in rent than they would pay in mortgage interest). With more of a stake in enterprise, and more capital available for enterprise, the economy will become stronger.